Undone in the dealing room

David Bullen at home in East Malvern, claims the NAB knew the four were trading over their limits.
Picture: Angela Wylie

Australia's currency dealers run on adrenaline during their short and furious careers. And sometimes deals come unstuck, David Elias reports.

The National Australia Bank's dealing room is busier than Bourke Street, which it overlooks. But the teams tracking worldwide currency and commodity movements have no time to notice the traffic snarls 22 floors below.

These are Australia's incarnation of the Masters of the Universe - young people, in their mid-20s to mid-30s, their sights fixed on earning bonuses that can, in a good year add $250,000 or more to their $120,000 salaries. They run on adrenaline for their short, furious careers, and expect to be burnt out before they are 40.

Some are talking to clients, most of whom are institutional investment managers looking to hedge exposure to the continual shifts in currencies, interest rates and the prices of a host of exchange traded commodities. Others are negotiating on screen with counterparts in dealing rooms in New York, London and elsewhere. They are taking orders, checking exchange rates and making split-second decisions on when to buy and sell. They can be in and out of a position in three minutes and there is never time for reflection or anxiety over the possibility of a wrong call and the loss of millions or more.

They are engaged in the most sophisticated form of horse trading known, and the amounts of money passing through their hands is mind-numbing. Last year, NAB dealers in derivative financial instruments wrote contracts with a face value of $1.7 trillion. That's $6.8 billion for each working day and it requires an extraordinary mixture of engagement and detachment to stay on top of the job.

"They have to have a lot of attitude," says a senior investment manager with a financial institution who dealt regularly with the close-knit group of NAB currency traders suspended this week over unauthorised trades that blew a $180 million hole in the bank's finances.

He likens them to the British barrow boys of old, as sharp as tacks and able to sum up situations in an instant and turn them to their best advantage - or bookmakers who constantly assess the odds against incoming bets and know when and how much to lay off with other bookies.

"When they are trading in such large positions they have got to be calm under extreme stress," the investment manager says. "I'd bet that the wives . . . had no idea of the trouble they were getting themselves into until it hit the fan."

The four men - Melbourne-based head of foreign exchange options Luke Duffy, 34, foreign exchange chief dealer David Bullen, 32, junior dealer Vince Vicarra and London-based dealer Gianni Gray - have sparked investigations by the Australian Prudential Regulation Authority and the Australian Federal Police, as well as an internal investigation into NAB's risk management procedures.

The men allegedly sought to recoup the $180 million losses on an ill-judged trade last October by repeatedly punting the bank's money on unauthorised trades. According to observers, the traders may have hidden the losses behind fake profits supposedly generated in trades between themselves.

For a reason yet to be explained, they assumed the rise of the Australian and New Zealand dollars against the US dollar had peaked and gambled on an imminent fall.

Instead, the currencies continued upward, the Australian dollar from an October low of US68 cents to its recent six-year peak above US78 cents. The NZ dollar went up from US59 in early October to US68 cents.

David Bullen has denied that any documentation had been falsified. He said that the bank knew they were trading over their authorised limits for months. He said the risk management people had signed off on the deals every day since October.

Glen van Ooran, a consultant, educator and media commentator with 17 years' experience in the futures and options trading industry, says it is almost beyond belief.

"If people get their figures wrong the losses are instantly crystallised, a good trader will apply a 2 per cent risk management ratio so he would have to have 48 consecutive losing trades, which is unlikely, before his trading account was wiped out," he says.

Mr van Ooran says traders must be able to analyse market conditions and co-ordinate activities in a calm, cool and collaborative manner. "If, as this suggests, they got emotionally involved with their losses, they should not have been trading," he says.

The fallout goes right to the top, where NAB chief executive Frank Cicutto is under pressure and his job is potentially on the line, because it is not his first disaster. Since he took over from Don Argus in 1999, the bank has become "accident prone". In 2001, the bank was forced into a $4 billion writedown on US mortgage provider HomeSide.

The foreign exchange market is the world's biggest market, with $1.5 trillion traded each day. The Australian dollar, underpinned by a sound commodities and resource-based economy and a stable political environment, is one of the five most traded currencies.

Currencies are traded as a means of covering the cost of goods and services as they are bought and sold across international boundaries.

Australia's agricultural output, for example, might be sold in US dollars or British pounds and the payment will be converted through the market into Australian dollars before it is paid into local bank accounts.

Currencies are also traded as a hedge against rises and falls in exchange rates. An importer in Australia might buy goods at a price set in US dollars but will not take delivery for six months.

To make sure he has the US dollars on the due date he will order them through the market at today's prices and pay the bank a fee to carry the risk of a fall in the local dollar.

Through the options market, it can be arranged so the importer need only call on the bank to make up the difference if the exchange rate goes against him while he profits from any favourable movement in the currency. It was in this highly specialised area of the business that the four NAB dealers seem to have come unstuck.